Education & Resources

Benefits of Forming a Captive

Captive Planning can customize a self-insured risk mitigation program designed to give management more control over virtually every aspect of coverage and administration to improve operational efficiency. By combining a conservative strategy of re-insurance against major losses, strong safety and risk management processes, and strong measures of assuring the validity of claims, the captive approach can be a strong cash-flow, high profit strategy that could return significant proceeds to its owners, while providing lower cost premiums.

For many businesses, the use of a captive insurance company to self-insure, or partially self-insure risks such as commercial general liability, workers’ compensation, auto and employee benefits, can be used both as a weapon and a shield to control the upswings and downturns in the commercial market. A captive can bypass many of the problems and frictional costs inherent in the insurance industry as it concentrates on its specific niche. Other benefits of self-insuring through a well-designed captive program are listed below.

Premium stability

Premium costs become stable and equitable for the captive’s owners over time because a captive can set its own insurance rates and customize coverage and policy language. Therefore, the captive can establish premium rates that reflect its own expected losses and avoid the impact of insurance industry coverage and pricing fluctuations.

Access to reinsurance

A captive provides its owners with direct access to reinsurance markets. When the market is soft, the captive can take advantage of the low rates by reinsuring a relatively large proportion of its risks. The low cost of reinsurance allows the captive to build its reserve base. When the market hardens, the captive is able to retain a larger proportion of its risks and can maintain cover for its owners even when commercial insurance is unavailable or prohibitively expensive.

Improved risk management

Financial self-interest encourages the adoption of risk-management best practices at most companies. Captive owners make continual and diligent efforts to improve their own risk practices because they have a direct interest (i.e., ownership) in the captive, which directly impacts the amount of their premiums and overall profitability.

Cost savings

Although captives will incur certain operating expenses, they usually are much lower than the expenses incurred by commercial insurers. Reductions result from the elimination of the profit element built into premiums charged by commercial insurers and reduction of expenses through the avoidance of high sales, marketing and administration costs of commercial insurers.

Exert control

Captive premiums are not directly subject to variable and often unpredictable commercial insurance markets. In contrast to commercial markets, the captive and its insureds receive an immediate economic reward for controlling losses.

Cash flow

Captives can provide significant cash flow benefits not available in the conventional market through underwriting stability, the ability to reduce costs and manage claims and with timing of premium payments to best suit its owners.

Unbundled support service

With a captive, it is possible to pick and choose the optimum combination of claims settlement, policy issuance, reinsurance protection and loss control. The captive benefits from reduced costs for infrastructure which results in lower premiums to its policy holders and increased profits to its owners.

Favorable regulations

The insurance industry is heavily regulated in all developed economies, with minimum capital and surplus requirements, solvency margins, specific ratios of premiums written to net assets and, in some cases, restrictions on investments. Captives are generally subject to less regulation than conventional insurance companies.